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The elasticity of demand

The elasticity of demand for union labor can be reduced by; a. Reducing the availability of substitute factors. The number of substitute factors is a determinant of the elasticity of demand for labor (see Chapter 24). The fewer the number of substitute factors for labor, the less elastic the demand for labor. Example 2A: Unions have often attempted to achieve their goals through the political process. To reduce the availability of substitute factors, unions would support restrictions on immigration and restrictions on the employment of nonunion workers during strikes. b. Reducing the availability of substitute products. Another determinant of the elasticity of demand for labor is the price elasticity of demand for the product that the labor produces (see Chapter 24). The less elastic the demand for the product, the less elastic the demand for the labor that produces the product. Reducing the availability of substitute products reduces the elasticity of demand for the product. Reducing the elasticity of demand for the product reduces the elasticity of demand for labor. Example 2B: To reduce the availability of substitute products, a union of widget workers would support legislation restricting imported widgets. Likewise, a union of public school teachers would oppose legislation providing for school vouchers that could be used to pay tuition at private schools. 2. Increase the demand for union labor. An increase in the demand for union labor will result in more union jobs at every wage rate. Example 3A: Assume that the labor demand curve from Example 1B shifts to the right. A greater quantity of labor will be employed at every wage rate. Wage Rate $24 - 21 - 18 - 15 - 12 - 9- z 0 0 3 6 9 12 15 18 The demand for union labor can be increased by; Quantity of Labor (thousands of hours) D = MRP a. Increasing product demand. The demand for a factor (like labor) is derived from the demand for what the factor produces (see Chapter 24). An increase in the demand for the product will cause an increase in the demand for the labor that produces the product. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 25 - 3 Labor Unions

Example 3B: To increase product demand, a union of widget workers would support legislation restricting imported widgets, or might launch a public relations campaign urging consumers to buy “American-made” or “union-made” widgets. A union of public school teachers would support a move from half-day to full-day kindergarten. b. Increasing the MPP of union workers. An increase in labor productivity (MPP) will increase the MRP of the labor, shifting the labor demand curve to the right (see Chapter 24). Example 3C: To increase the MPP of union workers, a union of widget workers might negotiate for worker training programs paid for by the employer. Or a union might simply negotiate higher wages which would encourage their employer to invest in more capital. The increased amount of capital would increase the MPP of the union workers. c. Increasing the prices of substitute factors. An increase in the price of a substitute factor for union labor would increase the demand for union labor. Example 3D: To increase the price of a substitute factor, a union of widget workers would support legislation increasing the minimum wage, or restricting the outsourcing of jobs to foreign countries, or imposing a global minimum wage. 3. Decrease the supply of union labor. A decrease in labor supply will lead to a higher equilibrium wage rate. The ideal situation to allow a union to control the supply of labor is a closed shop agreement with the employer. Closed shop – requires union membership as a condition for employment. A closed shop agreement would give a union the ability to restrict the supply of labor available by simply not admitting new members to the union. As discussed below, closed shop agreements are illegal. But most states allow for an alternative called a union shop agreement. Union shop – requires employees to join the union within a specified time. A union shop agreement ensures that all eligible workers will be union members. This increases the union’s bargaining power. A threat of a strike is more convincing when there is 100 percent union membership. As discussed below, union shops are illegal in some states. The Taft-Hartley Act (1947) prohibited closed shop agreements in all states. The Act also gave the individual states the power to pass right-to-work laws. Right-to-work laws prohibit union shops. In the twenty-four states that have enacted right-to-work laws, every shop must be an open shop. In open shops, workers may join the union or may choose to not join the union. Workers who choose to not join the union are still covered by the collective bargaining agreement. The more workers who choose to not join the union, the weaker is the union’s bargaining power. The most recent state to pass right-to-work was Michigan, in 2012. Collective Bargaining Collective bargaining is where a union bargains with management on behalf of the workers. The union, as a type of labor monopoly or cartel, will have more bargaining power than the individual workers would have. A union has market power and can directly affect the wage rate through collective bargaining. The most important bargaining tool available to a union is the threat of a strike. A union might use the threat of a strike to negotiate a wage rate above equilibrium. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Labor Unions 25 - 4